SAN FRANCISCO / Ruling against Macy's saves city millions

San Francisco scored a multimillion-dollar legal victory Wednesday when a state appeals court slashed a refund the city owes to Macy's because of the retailer's successful challenge to a local business tax.

Under a city ordinance in effect from 1995 through 1999, a business had to pay taxes based on either its payroll or its sales revenue, whichever yielded the higher tax. The city repealed the ordinance in an $80 million settlement with hundreds of companies that challenged the tax, including the Hearst Corp., which owns The Chronicle.

Macy's did not take part in the settlement and won a ruling in 2004 from Superior Court Judge Richard Kramer that the tax was unconstitutional. Kramer said companies like Macy's that did business in San Francisco and other California cities could be required to pay higher taxes, under varying local levies, than similar-size businesses that operated only in San Francisco.

To discourage the city from imposing invalid taxes in the future, Kramer granted Macy's request for a refund of all the business taxes it had paid while the ordinance was in effect, a total of more than $13 million, including interest.

But the First District Court of Appeal in San Francisco ruled Wednesday that the retailer was entitled to recover only the amount by which it might have been overtaxed and not the entire tax. That would limit the refund to a few hundred thousand dollars, said City Attorney Dennis Herrera, who called the ruling "a great victory for the taxpayers."

One other business, IBM Credit, has a similar refund case pending, said Julie Van Nostern, the city's chief tax lawyer. Macy's attorney was unavailable for comment.